Shares of Uranium Resources (URRE) exploded this week as Japan hit the switch on its first nuclear reactor since the earthquake-and-tsunami fueled nuclear disaster of 2011.
The Centennial, Colo. uranium mining company idled its operations years before Japan shut down all nuke plants in the wake of the Fukushima disaster.
Yet investors have begun grabbing URRE stock on the hope that Japan’s nuclear plans might make it worthwhile for URRE to restart mining. Though the price is settling down, this speculation shot URRE shares up by a whopping 61 percent in a few days to close Wednesday at $2.49.
But all is not quite as optimistic as it seems.
“Uranium Resources will probably be bankrupt before that one plant starts up,” an analyst who requested anonymity told TheStreetSweeper. “It’s a really tough situation.”
Here are highlights of the gut-wrenching situation:
*Production has ceased. URRE hasn’t produced one ounce of uranium in five years.
Here’s what a URRE filing says:
“As a result of low uranium prices, we ceased production of uranium in 2009.”
“None of URI's properties are currently in production.”
*URRE would restart mining only if uranium reaches and sustains prices above the cost of restarting and production, at least in the mid-$40 range.
Here’s what executives said in the Nov. 6 conference call:
“So the calculation would show that spot price of $43 … $44, $45 dollar price assuming $10 premium to long term, yes we have the 10% margin we need to get started.”
*Optimism over Japan has propped up the price, but uranium still sells for an unprofitable $41 per pound.
Uranium's only significant commercial use is to fuel nuclear power plants that generate electricity. The Fukushima meltdown tanked uranium prices and Japan's shutdown of its remaining 47 nuclear plants kept the prices down.
Even if magic happens – Japan restarts one nuclear plant by about the second quarter of 2015, and uranium prices hit $45 or more and remain there – URRE would still require millions and at least the better part of a year to restart operations. In fact, URRE leaders spoke of a 3-year to 5-year timeframe:
“We can be ready to produce in south Texas on nine months’ notice provided we see two things; up price, spot price in little 40s and a trend to support that price. So we tend to think of that in terms of three to five years more than anything else is because we are operators on nature and we wish to be conservative in our outlook for the company just so we are making promises we can keep.”
*URRE runs through about $1 million per month, though it produces nothing. So its piggy bank contains only enough cash to make it about 6 months.
A company Securities and Exchange Commission filing warns:
“Our future uranium production, cash flow and income are dependent upon the results of exploration as well as our ability to bring on new, as yet unidentified well fields and to acquire and develop additional reserves. … we may not be able to remain in business and our stockholders may lose their entire investment.”
*Flooding the market with millions of shares? It could happen because to hit “start,” again, URRE would need mega-bucks that it just doesn’t have.
So, where would the $6 million-to-$7 million come from that execs say would be required to restart mining?
That’s about how much money is available now and the company is burning millions a quarter – thanks partially to executives getting $2.2 million in compensation including $437,984 in stock-based bonuses last year as they run the company that hasn’t made a dime in five years.
The company could consider several options to try to meet its needs for restarting: a stock offering, get a loan or sell properties.
The first option would be to sell stock under the ATM agreement. The deal has already allowed URRE to sell nearly 800,000 shares of stock. Earlier this month, the company noted it still has $6.3 million worth that it could sell.
So the company could jump out with a multi-million share offering.
Under the second option, URRE has exhausted its senior convertible loan. And, considering the negative sentiment, the energy climate, unstable uranium prices and the company’s underperformance, URRE isn’t a good prospect for getting a new loan.
Part of the loan problem is the oversupply of uranium. A few years before the Japan shutdowns, uranium fetched upwards of $80. Though uranium is about $41 due to the Japan restart noise, the price has generally trended downward, falling to around $28 this summer.
The third option of selling property offers little promise. Anyone willing to pay millions for cast-off, non-producing properties in the struggling, costly remediation, highly protested solution uranium mining niche? Hmm. We didn’t think so.
Japan’s restart of one plant, probably early next year, won’t change the demand-supply dynamics. Any additional nuclear plants will require a protested, long journey that could take years or decades or forever – so the uranium price increase likely won’t be sustained. Besides, with oil around $80 per barrel, there may be less incentive for Japan to switch from petroleum to nuclear.
URRE can’t change the price of uranium but must ultimately be able to sell the radioactive mineral profitably.
So, in our view, it comes down to just a couple likely options for URRE. It sells stock, diluting shareholders.
Or it becomes a NASDAQ shell that must find another story/business.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in URRE and stand to profit on any future declines in the stock price.
Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].